With the growth of dental group practices and DSO’s (dental service organizations/dental support organizations) and the challenges of management and retaining high quality staff, equity sharing and equity bonus plans have become a focus for many. Equity sharing has repeatedly been shown to have the potential to improve not only performance but organization wide culture.
Unfortunately, many groups don’t have an understanding of the complexity or consequences of sharing equity. Clearly sharing equity in a group dental practice can’t be a back of the napkin approach. It requires careful deliberation and most of all long-term financial forecasting and projections of the cash flow of the dental practice and as applicable the exited strategy of the owners of the dental practice. There are many things to consider. In developing your equity sharing plan you should have a clear understanding of the benefits and consequences of the following:
Basic Issues In Choosing a Plan:
- How Much of Your Company’ Equity or Equity Value will You Share
- Liquidity
- Deferred Compensation Rules Under Section 409A
- Who Will Be Eligible
- Broad-Based Ownership Rights
- How Much Will Each Person Get
- Holding Periods and Forfeitures
- Vesting
- Voting and Control
- Dividends
- Valuation impact
- Sale and Exchange and Transferability Issues
- How are Profits Allocated vs How is Cash Flow Distributed
Types of Plans
- Cash and Equity Bonus Plans
- Phantom Stock Plan
- Restricted Stock Plan
- Restricted Stock Units
- Direct Stock Purchase Plans
- Performance Award
- ESOP
Tax Consequences
- What are the tax consequence to the employee
- What are the tax consequences to the DSO or group practice
- What are the long-term tax consequences to founder owners
Reporting Issues
- What reporting requirements will you have to the employees/owner
- What reporting requirements will you have to the IRS
- What records will need to be maintained
- What are the complexities of maintaining Capitalization Tables
- Will you be required to change you accounting method
- Will you need audited financial statements
These are just of few of the many things that you need to understand as you develop you equity sharing plan. Please follow our regular updates on Equity Sharing Plans and always feel free to contact me with questions.
Greig Davis CPA CVA MST – Dental CPA
Dental ROI Associates PC – Dental CPA’s
Results by Design
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